Decentralized finance, or DeFi as it’s more commonly known, has become increasingly prominent in the last year.
DeFi is an ecosystem of financial instruments running on top of various blockchain platforms, and at the current rate of growth, it is set to change the way we think about financial solutions.
One area where blockchain and DeFi is already making a difference is in loans.
TrustToken is the company behind TrueFi, which is the first DeFi platform for uncollateralized lending and borrowing.
TrueFi’s uncollateralized lines of credit and its credit model are designed to enable borrowers on TrueFi to acquire a score resembling that of a traditional credit score. Instead of the community voting on individual or flash loans, trusted users of the TrueFi platform have access to a stable line of credit on more fixed terms.
And if you’re wondering what the term “uncollateralized lending” means, you can substitute it for the mainstream term, “unsecured loan.” Which is a point I brought up with Michael Gasiorek, Head of Marketing at TrustToken. If we’re going to eventually make cryptocurrency, blockchain, and DeFi as mainstream as fiat, do we also need to speak the existing language?
“Definitely, yes,” Gasiorek said. “Our position is to gradually win both terms: uncollateralized lending speaks to our beachhead market of largely crypto-savvy DeFi users already familiar with overcollateralized lending and looking for its natural evolution. It worked for the first $100 million in uncollateralized loans. But if we want to be hitting the first $1 billion in TrueFi loans, and eventually $1 billion per year and per month in such loans, we need to keep moving towards globally accepted, Wall Street lingo.”
Mainstream adoption of solutions like this will also rely on other forms of cryptocurrency. While Bitcoin (BTC) and Ethereum (ETH) grab all the headlines, they are also volatile currencies, prone to huge sways in value. Loans and other forms of finance have traditionally been required to be more stable for risk-averse lenders. So, stablecoins could be the answer, and TrustToken not only has its own TUSD stablecoin, will be supporting USDC, a popular stable token.
“It’s fantastic for the crypto market as a whole and great for TrueFi,” Gasiorek said. “USDC is the very next asset coming to the TrueFi protocol, likely to be followed by other stablecoins, as well as BTC and ETH. The protocol is designed to be lending asset agnostic – it will eventually support any ERC-20 token, and possibly cross-chain assets, too.”
The popularity of USDC could create a virtuous cycle for everyone that uses DeFi platforms that support it.
“The greater the adoption of these assets in the larger market, the greater the demand for loaning them,” Gasiorek said. “This means more new borrowers coming to TrueFi, competing for larger loans, and driving returns up for lenders. Mainstream adoption is the rising tide that lifts all boats. We couldn’t be happier about USDC’s success.”
Right now, the value of the loans on the platform tends to be 6 or 7-figure amounts, so this is not a consumer loan platform at present, but it is a significant move forward in DeFi loan solutions.
“To limit default risk and also guarantee the highest rates of utilization, it was obvious TrueFi should work with the largest, most reputable players in crypto like Alameda Research, Poloniex, and Wintermute Trading,” Gasiorek said. “These funds and exchanges are largely using their loans to make trades, provide liquidity, capture arbitrage opportunities, or provide liquidity – all of which is part of their loan application, is reviewed by an internal Credit Committee, and has implications for the terms of their loan.”
So how does TrustToken and TrueFi make its money?
“TrustToken Inc is a private, for-profit business that makes money across a few business lines (stablecoin interest payments, the appreciation of its TRU corporate holdings, corporate services, and more,” Gasiorek said. “TrueFi is largely the opposite. It’s a decentralized protocol that doesn’t capture value for any single, private operator. Instead, it aims to create value for lenders, borrowers, and TRU token holders who stake on and govern the platform. A plan to transition all TrueFi related assets from TrustToken Inc. to a nonprofit foundation is already underway, following a path to progressive decentralization similar to other DeFi projects we admire like Compound and Aave.”
Certainly, we’re going to hear a lot more about DeFi throughout the rest of 2021, not just in loans, of course, but in every aspect of finance. TrueFi has already facilitated $46 million in loans and generated over $100,000 in returns for stablecoin lenders.